Spain’s recession deepens on budget cuts

CONTRACTION:：GDP declined 0.7 percent in the fourth quarter and 1.37 percent for the full year, as output suffered from five austerity rounds in less than a year

Bloomberg

Thu, Jan 31, 2013 - Page 15

Spain’s recession deepened more than economists forecast in the fourth quarter as the government’s struggle to rein in the eurozone’s second-largest budget deficit affected domestic demand.

GDP fell 0.7 percent in the three months ending December from the previous quarter, when it declined 0.3 percent, the Madrid-based National Statistics Institute (INE) said yesterday. That is more than the 0.6 percent contraction the Bank of Spain predicted on Jan. 23.

GDP fell 1.8 percent in the fourth quarter from a year earlier and 1.37 percent over the full year from 2011, INE said.

The European Commission this week signaled it may recommend easing Spain’s budget goals for the fourth time in a year as unemployment in the euro region’s fourth-largest economy rose to a record 26 percent at the end of Spanish Prime Minister Mariano Rajoy’s first year in power.

“We should be circumspect; the domestic demand contraction is severe and more of the same is likely in the first half of 2013,” said Guillaume Menuet, a senior economist at Citigroup Inc in London. “The current market momentum is such that investors have to chase the rally, masking economic fundamentals to a large degree.”

The yield on Spain’s 10-year benchmark fell to 5.14 percent at 9:18am yesterday in Madrid from a euro-era high of 7.75 percent in July last year. The spread with German borrowing costs has narrowed about 45 percent to 3.44 percentage points. Investors see bonds from so-called EU periphery countries offering even more gains than last year after European Central Bank President Mario Draghi pledged to do whatever is needed to save the 17-nation euro.

Citigroup forecasts GDP will shrink 2.2 percent this year with a budget deficit at 6.3 percent of output and unemployment at an average 26.9 percent.

The Bank of Spain said last week that domestic demand may have dropped 3.9 percent last year from a year earlier, nearly twice as sharply as in 2011, as output suffered from five austerity rounds in less than a year. The last cut public wages and unemployment benefits while increasing the value-added tax.

Data show retail sales fell 10.7 percent last year from a year ago, more than economists expected, while home mortgage loans slid 32 percent in November, twice the previous monthly drop.

Missed payments as a proportion of total loans at Spanish banks rose to a record 11.4 percent in November.

The IMF last week cut its forecast for Spain’s economy and predicts a 1.5 percent contraction this year as the only drivers left weaken amid a European slowdown. The number of tourists visiting last month dropped from a year earlier, with an 11 percent decline from UK holidaymakers, the largest group. Exports fell in November last year.

Public-job cuts are boosting unemployment as the nation’s 17 semi-autonomous regions race to divide their combined budget deficit by five in the two years through next year. A third of all jobless people in the euro area are in Spain.